Should You Buy ArcelorMittal (MT) or BT Group plc (BT)?

ArcelorMittal (NYSE:MT) shares are down more than -19.88% this year and recently decreased -0.90% or -$0.15 to settle at $16.56. BT Group plc (NYSE:BT), on the other hand, is down -31.38% year to date as of 09/12/2019. It currently trades at $10.43 and has returned 1.56% during the past week.

ArcelorMittal (NYSE:MT) and BT Group plc (NYSE:BT) are the two most active stocks in the Steel & Iron industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.

Growth

Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect MT to grow earnings at a -9.24% annual rate over the next 5 years. Comparatively, BT is expected to grow at a -11.50% annual rate. All else equal, MT’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return. ArcelorMittal (MT) has an EBITDA margin of 5.5%. This suggests that MT underlying business is more profitable MT’s ROI is 12.60% while BT has a ROI of 10.30%. The interpretation is that MT’s business generates a higher return on investment than BT’s.

Cash Flow

Earnings don’t always accurately reflect the amount of cash that a company brings in. MT’s free cash flow (“FCF”) per share for the trailing twelve months was +0.62. Comparatively, BT’s free cash flow per share was -0.03. On a percent-of-sales basis, MT’s free cash flow was 0.83% while BT converted -0.19% of its revenues into cash flow. This means that, for a given level of sales, MT is able to generate more free cash flow for investors.

Valuation

MT trades at a forward P/E of 7.37, a P/B of 0.40, and a P/S of 0.23, compared to a forward P/E of 45.35, a P/B of 1.43, and a P/S of 0.71 for BT. MT is the cheaper of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. MT is currently priced at a -36.91% to its one-year price target of 26.25. Comparatively, BT is -35.85% relative to its price target of 16.26. This suggests that MT is the better investment over the next year.

Risk and Volatility

Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. MT has a beta of 2.75 and BT’s beta is 0.80. BT’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. MT has a short ratio of 1.35 compared to a short interest of 1.76 for BT. This implies that the market is currently less bearish on the outlook for MT.

Summary

ArcelorMittal (NYSE:MT) beats BT Group plc (NYSE:BT) on a total of 12 of the 14 factors compared between the two stocks. MT is growing fastly, is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. In terms of valuation, MT is the cheaper of the two stocks on an earnings, book value and sales basis, MT is more undervalued relative to its price target. Finally, MT has better sentiment signals based on short interest.